Market Matters Weekend Report Sunday 23rd February 2020
Market Matters Weekend Report Sunday 23rd February 2020
Last week the ASX200 reached and potentially rejected our 7200 short-term target area with the previously strong high Valuation IT stocks the major headwind for the index, although the numbers were a little skewed by especially poor performances from Wisetech Global (WTC), EML Payments and Altium (ALU). Interestingly the Financials, the backbone of our index from a market cap / weighting perspective, were solid even following a capital raise by Bendigo Bank (BEN) and heavyweight Commonwealth Bank (CBA) trading ex-dividend – for MM to be correct and another 4% pullback to unfold short-term we might need a rare occurrence to contradict of one of our most quoted sayings “The Australian market doesn’t go down without the banks”.
As subscribers know MM anticipates a choppy stock market through 2020 / 2021 hence we are buyers of pullbacks and selective sellers of strength. Recently we increased our cash position from 1% to 12%, its never enough when the market does have a decent pullback but at MM, we are about prudent risk / reward investing, not trading. I felt at this stage it was worth stepping back and reiterating our current thoughts about the index as opposed to specific stocks / sectors:
1 – MM went bullish when the index retraced to 6900 on coronavirus panic – we increased our market as much as possible, leaving just 1% cash in the Growth Portfolio. It simply felt like panic selling into a “cashed up” market although we would have reassessed this view quickly had the situation deteriorated further i.e. panic lows are usually rejected quickly, just as we have witnessed by the last 6 spikes to the downside since August 2019 and this was again repeated in the first few days of February.
2 – Once the index cleared 7000, we became very comfortable with our short-term bullish technical outlook targeting the 7200 region i.e. the post GFC bull trend remained intact and we felt cashed up fund managers would be almost forced to chase stocks higher.
3 – Last week when the market tested 7200 the index was already up almost 8% for 2020 and MM simply felt the inherent risks of the coronavirus were being totally discounted by global stock markets which are trading around record valuations i.e. we could see plenty of risks for the downside compared to limited short-term upside.
4 – Hence we have moved to a 12% cash position in our flagship Growth Portfolio, looking to “pounce” on a pullback, our ideal target area is ~6900 less than 3% below Saturday mornings close on SYCOM. We will discuss our favourite 3 stocks to buy later in today’s report.
NB Market swings of 3-4% are basically no more than noise in the grand scheme of things but when a market is dancing to our tune there’s no reason not to add some value / alpha around the edges but stock / sector selection will usually be the ultimate determinant of a good, or average year.
Last week we quoted that over the last 6-months the ASX200 has already experienced corrections of 7%, 4.4%, 4.4%, 3% and 3.5% which equates to an average pullback of more than 4% every 5-weeks. This implies a couple of important things, firstly our call for both a choppy 2020 / 2021 and a 4% pullback from last week’s high is nothing more than believing that the current market rhythm has further to run. However since the ASX’s most recent major swing low back in 2016 its experienced pullbacks of 10%, 7%, 15% and 7% producing an average a correction of 10% annually, in our opinion 2020 won’t be any different suggesting the current complacent buyers of pullbacks aren’t too far away from an uncomfortable ride – some fascinating & exciting times lie ahead for stocks and especially “Active Investors” like MM.
MM remains keen to increase our market exposure around the 6900 area. i.e. ongoing “tweaking”.
On Friday night the US equities were weak with the NASDAQ leading the decline falling almost 2%, the SPI futures are pointing to poor opening on Monday down around 45-points, implying the ASX200 will test initial strong technical support ~7100.
ASX200 Index Chart
Global Indices
US stocks actually experienced a rare negative week as February slowly comes to a close with the coronavirus news still providing most of the day to day volatility. On Friday night we saw investors run for safe havens as gold and bonds surged as the cases of coronavirus accelerated outside of China intensifying concerns around the impact on the global economy – on Saturday afternoon we saw the total number of cases approach 80,000 and deaths 2,500, I find it hard not to call this a pandemic but politicians have their own vocabulary.
At MM we are focusing on a couple of important views / points:
1 – The number of fresh cases in Wuhan, the epicentre of the breakout appears to be clearly slowing implying Chinas containment measures are working.
2 – Conversely, we feel it’s inevitable that secondary countries will see a pickup in cases / deaths and how badly things unfold will depend on their respective governments’.
3 – Doctors will eventually find a cure / vaccine which will alleviate much of the market’s current panic / volatility with the million-dollar question obviously when.
4 – We believe global central banks will look to reinvigorate the already lacklustre global economy with almost bazooka like aggression which MM believes will herald a bottom for bond yields and inflation – the PBOC are most likely to go first.
MM anticipates some consolidation by the US NASDAQ between 9000 and 9750 i.e. up to 5% more downside.
I reiterate if we are correct and the NASDAQ can correct ~5% over the coming weeks we regard this as buying opportunity.
US NASDAQ Index Chart
If MM is correct and a few % lower represents a good buying opportunity the implication is the significant outperformance by Growth stocks over the Value ones has further to unfold but we do believe this is a very mature trend and we are likely to see the elastic band stretch too far in 2020, it may have already!
Growth Stocks – A growth stock is a company that is anticipated to grow at a rate significantly above the average for the market. These stocks generally pay small or no dividends, as the companies usually aim to reinvest earnings in order to accelerate growth e.g. IT stocks.
Value Stocks – Value stocks usually trade at a lower price relative to their fundamentals, such as dividends, earnings, and sales, making them appealing to investors with longer time horizons or yield investors who play a huge role in our market e.g. the banks.
US Growth v Value Indices Chart
Bond Yields are following MM’s path
The picture from the bond market continues to coincide nicely with our preferred technical and fundamental scenario for 2020, on Friday night one large piece of the puzzle fell into place. Last week I highlighted the below 2 views:
1 – “US and domestic bond yields look perfectly positioned to break lower which implies a flight to the safety of bonds, potentially a case of short-term sell stocks and buy bonds.” – on Friday night US stocks fell with the S&P500 down over 1% and US 10-year bond yields made fresh multi-year lows.
2 – “MM continues to look to fade this move if it unfolds as we’ve been outlining for many weeks i.e. sell bonds into a break to multi-year lows on yields” – watch this space, especially in our MM Global Macro ETF Portfolio.
If we are correct and US stocks have a few more % to fall then the likelihood is US 10-year bond yields will break under 1.4% but we are seeing what we anticipated, it’s not the time to become too pedantic!
US 10-year Bonds Yield Chart
Locally the Australian 3-year bond yields look again set to nudge their all-time lows on Monday morning, closing on Saturday morning at 0.61%.
MM believes the Australian 3-years will makes fresh all-time highs, probably sending their yield under 0.5%, but we believe this is the last piece of the pie. As discussed, a few times last week we believe the RBA do not want to cut interest rates, imagine where property prices would go if the RBA Cash Rate was cut from 0.75% to 0.25%.
Australian 3-year bonds Chart
Most Resources appear to have found support.
Global growth concerns around the coronavirus saw equities walloped on Friday night (not the most popular day of the week lately) as the outbreaks tentacles spread far and wide, although China’s extreme containment measures appear to be working as the rate of fresh cases look to be on the decline. Interestingly this was arguably reflected by the likes of copper and oil closing in the green on Saturday morning while golds $US28 surge to fresh 7-year high was the clear star performer.
We believe the current decline in resource stocks is a buying opportunity although they potentially have a little further to go considering the position of global indices.
MM believes is its time to be accumulating resource stocks.
Bloomberg Base Metals Index Chart
Crude oil appears to have regained a degree of optimism towards China closing last week over 8% above this month’s low. We can see a quiet period of rotation between $US50 and $US55/barrel but unless Chinas apparent containment of the virus reverses, we think this commodity has already started looking for a low.
MM continues to believe it’s time to start accumulating oil stocks into weakness.
Crude Oil Chart
Reporting season is having a huge impact under the hood of the ASX
In the previous week we saw a 5% differential in performance between the banks and energy stocks, last week reporting season scuttled the IT sector sending the high valuation group down almost 6% – with the NASDAQ falling hard on Friday night / Saturday morning we feel this underperformance has got further to run – the “Momentum Traders” probably need to get off some of the sectors big winners for 2020, they’re selling often send stocks much lower than many expect.
Stock market indices and bond yields have started moving as we have been anticipating at MM hence if we are correct on the ASX what about the respective stocks / sectors? Today we have touched on 2 major groups where MM believes the baton of outperformance is about to pass hands:
1 ASX200 Banking v IT Sectors.
When we compare the Banking and IT sectors the comparison is clearly distorted to a degree by the differential of yield between the 2 groups but there’s clearly still only one winner.
MM has a preference for banks over IT stocks at least short-term.
ASX200 Banking v IT Sectors Chart
2 ASX200 Energy v Utilities Indices.
Last week we looked at the Real Estate Sector which has enjoyed the huge tailwind of falling interest rates over the last 8-years, today we’ve considered the similarly correlated Utilities index. The Energy Sector has seen a world looking to move away from fossil fuels plus for good measure the oil price has been crunched by the coronavirus. MM still believes the Mining and Oil Sectors are in the process of being oversold into a major buying opportunity, we are already long hence must be prudent when increasing our exposure.
MM believes it’s time to start switching from Utilities & Real Estate to Energy stocks.
NB I cannot imagine being overweight oil stocks for more than the medium-term hence we don’t believe it’s an ideal area for long term buy and hold subscribers.
ASX200 Energy v Utilities Indices Chart
1 – The MM Growth Portfolio
Last week we sat on our hands at MM with the Growth Portfolio, hence our cash position remains at 12% providing a reasonable degree of flexibility – https://www.marketmatters.com.au/new-portfolio-csv/
MM has been targeting the 7200 area for the ASX200 and with Mondays likely gap lower its unlikely we will be pressing the sell button in the near future, it’s more a case of what to buy if / when we see a pullback to ~6900.
Selling: Evolution Mining (EVN) – MM is looking for another ~5% upside from the VanEck Gold stocks ETF (GDX US), this should enable us to take a small profit on our EVN position.
Buying: Fortescue Metals (FMG), an IT stock like Xero (XRO) and a bank (s).
Obviously, this list will evolve further over what’s a volatile period for stocks but considering how we see markets at present its unlikely to deviate greatly. Our current targeted buy levels are as follows and remember stocks don’t all bottom when the index does hence, we might commence buying when we remain net bearish the index:
1 – Fortescue Metals (FMG) our ideal buy area is around $10.50 before the stock trades ex-dividend on the 2nd of March.
2 – If we see a sharp correction in the local IT sector MM will consider buying a quality name in this high Beta group e.g. Xero (XRO) around $80.
3 – A bank: A regional like BOQ is higher risk but on the table, CBA is too expensive leaving NAB & WBC in the mix (we’re not keen on ANZ’s 70% franking). Macquarie is also on our radar depending on the depth its pullback.
NB High Beta means the stock usually moves in an amplified manner to the ASX.
Fortescue Metals (FMG) Chart
Xero Ltd (XRO) Chart
2 MM Income Portfolio
Our overall cash position remains at 4.5% in this portfolios : https://www.marketmatters.com.au/new-income-portfolio-csv/
We remain keen on adding Smart Group (SIQ) to the income portfolio after it reported this week. The report was solid and the prospects for that stock are now improving. We have one property stock too many in the portfolio, holding both Stockland and Abacus, although both reported well and rallied.
If the market does correct, we may look at switching from 1 or 2 of our more traditional yield play positions to another high yielding bank / resource stock which should benefit operationally from increasing yields / or a pick-up in global growth. We expect to cut CBAPF to increase our allocation to equities as previously outlined.
An out of favour bank is a potentially perfectly fit for our Income Portfolio, especially considering our view on bond yields, their yield clearly remains very attractive in today’s environment – ANZ Bank (ANZ) 5.9%, Bank of Queensland (BOQ) 8% and Bendigo Bank (BEN) 6.2%. By definition the greater the yield the greater the risk but BEN has just reported and raised capital, hence below $10 it catching our attention.
Bendigo Bank (BEN) Chart
3 – MM International Equites Portfolio
No change in our International Portfolio with our cash position still at 21% : https://www.marketmatters.com.au/new-international-portfolio/
We continue to believe the market is set for a period of choppy rotation but if we are correct global equities are set to correct ~5% hence we are currently scanning the horizon for buying opportunities, especially as we have a fairly large cash position. Our favourite 3 stocks at this stage are fairly mainstream but it’s important to have a handle on levels we are considering:
Buy –LVMH Moet Hennessy (MC FP), Microsoft (MSFT US) and UBS Group AG (UBS US) looking for a turn in the beaten-up European banking sector.
UBS Group AG (UBS AG) around $12.50 ,LVMH Moet Hennessy (MC FP) ~Eur370 and Microsoft (MSFT US) below $US170.
NB We may also add to existing positions at certain levels e.g. Apple (AAPL US) around $US300, or 4% lower.
Microsoft (MSFT US) Chart
UBS Group (AG) Chart
Sell –Barrick Gold (GOLD US).
MM is currently sitting on a 37% paper profit with our Barrick position, but this is no reason to sell, at this stage we believe there’s another ~15% on the table.
Barrick Gold (GOLD US) Chart
4 – MM Global Macro ETF Portfolio
Also no change to the MM Global Macro ETF Portfolio but a lot of activity looks to be approaching on the horizon, our cash position remains at 41.5% : https://www.marketmatters.com.au/new-global-portfolio/
Following falls in equities and rallies in bonds (yields down) at the end of last week MM feels things are finally aligning with our macro views hence we expect to be very busy in the next week or so with this portfolio.
Buy – ProShares Short 20+ US Treasury ETF (TBF US), NASDAQ Invescco ETF (QQQ US), iShares MSCI Europe Financials ETF (EUFN US) and the Invesco DB Agricultural ETF (DBA US).
NB MM feels the TBF and DBA are buys now while the QQQ and EUFN we believe will provide a better entry level in the coming weeks.
iShares MSCI European Financials ETF (EUFN US) ETF Chart
Last week I touched on why I was being pedantic with our entry level into the TBF, the trend was down and the coronavirus was adding to concerns around the global economy hence it was a simple decision not to fight the momentum. However now it’s broken to fresh lows MM believes its time to start accumulating. i.e. plan the trade and trade the plan.
MM has been looking to buy the TBF around the 18 level i.e. now!
ProShares Short 20+year US Treasury ETF Chart
No change here, MM remains very keen on the Agricultural Index which from an investors risk / reward angle is looking exciting following its more than 50% plunge over the last 8-years, our preferred vehicle of choice is the Betashares (FOOD AU) ETF: https://www.betashares.com.au/fund/global-agriculture-etf/
MM is bullish the Agricultural Index which should eventually increase both inflation and bond yields.
NB The BBG Agricultural Index includes the likes of coffee, corn, soybeans, cotton, sugar and wheat.
BBG Agricultural Index Chart
Sell – iShares MSCI Silver ETF (SLVP US), ProShares Short S&P500 ETF (SH US) and VanEck Gold Miners ETF (GDX US) – a total of 20.5%.
These 3 sells are highly correlated and very likely to all unfold within 24-48 hours hence subscribers should be ready for some action!
VanEck Gold Miners ETF (GDX US) Chart
Chart of the week.
It hurts to put the NCM chart here because we closed our position a few weeks ago around $29.25 but at MM we pride ourselves on being transparent hence NCM is back in the fray, looking bullish technically.
Technically MM feels NCM is poised to rally ~15%, towards it 2020 high.
Newcrest Mining (NCM) Chart
Investment of the Week.
This could easily have been “Chart of the Week” but considering the action (s) MM is considering we felt it was more appropriate to position it here.
MM is bullish the Australian Banks with an initial target ~10% higher + dividends.
ASX200 Banking Index Chart
Trade of the Week.
Don’t worry I haven’t lost the plot, this is just a simple risk / reward idea, after all AMP has rallied over 30% from its 2019 lows.
MM is bullish AMP with stops at $1.96.
AMP Ltd (AMP) Chart
Our Holdings
Our positions as of Friday. All past activity can also be viewed on the website through this link.
Weekend Chart Pack
The weekend report includes a vast number of charts covering both domestic and international markets, including stock, indices, interest rates, currencies, sectors and more. This is the engine room of our weekend analysis. We encourage subscribers to utilise this resource which is available by clicking below.
Have a great day!
James & the Market Matters Team
Disclosure
Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.
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